ShipRecycling Pages:

15 September 2016

Smashed Fortunes

How market speculators in
China upended life in India’s ship-recycling yards

ALANG, India—In the world’s biggest ship-recycling
yard, dozens of men toil under a blazing sun, carving up the remaining portion
of a vessel on the seashore. During the nearly five months it has taken for the
ship they are working on to arrive at the yard and get broken apart for scrap,
the price of the steel the yard is culling has skyrocketed, then
plummeted—dragged along by roller-coaster trading thousands of miles away in
China.

The yard owners of Alang, where half of the world’s
ships are recycled, say they are shocked by the volatility—the like of which
they hadn’t seen since the global financial crisis in 2008. Many of the yards
here, in the western Indian state of Gujarat, are saddled with losses from
buying near-record numbers of boats when steel prices were surging earlier this
year, then selling the scrap metal after prices had crashed.

Now, though steel prices in China have risen from a
May low, the scrappers are struggling with a glut of metal in India that is
keeping a lid on domestic prices, and have slammed the brakes on more ship
buying.

“From last December onwards, we saw prices improving
suddenly, so all of us purchased ships,” says Ramesh Aggarwal, yard owner at
Alang’s Hooghly Ship Breakers Ltd. “Now all of us are facing a similar
situation because of the fall in prices. Our profits have been wiped out.”

The whiplash rattling the multibillion-dollar
ship-recycling industry illustrates how the rapid growth of commodities futures
trading on China’s still largely closed domestic markets is rippling into the
real world. The industry is a leading employer in Bangladesh, and an important
one in Pakistan and India, providing jobs for hundreds of thousands of mostly
poor workers.

The volatility coincided with the global shipping
industry coming under pressure even as demand for its services have been
rising. The crunch in global trade has left owners sitting on too many ships
and eager to sell them for scrap.

Until a few years ago, Alang’s yards watched steel
prices quoted in both international and South Asian markets to decide whether
to buy ships, and how much to pay for them. Those prices rose and fell largely
in line with supply and demand for the metal in markets like China, which is
the world’s largest producer and consumer of steel.

That dynamic changed when China’s breakneck growth
started to slow several years ago. The country kept its forges blasting while
many other global steel producers cut theirs back. That made China more
dominant in global steel markets even as prices plummeted due to a surplus of
the metal. China has comprised around half of the world’s steel output since
2013, versus nearly a third in 2008. Last year, China’s steel exports alone
topped the total steel output of the No. 2 producer, Japan, and were around 40%
more than the total production of the U.S.

Alang’s scrapyards, which sell to Indian buyers,
began to contend with a flood of cheap steel from China, and its scrap prices
started to more closely track steel prices in China, reflected in futures
contracts traded in Shanghai.

Shanghai’s influence on Indian scrap-metal prices
“has increased substantially over the past one-and-a-half years,” said Anil
Sharma, chief executive officer of GMS, the world’s largest buyer of ships and
offshore assets.

Late last year, Shanghai’s futures markets started
heating up. Opportunistic Chinese traders saw low steel prices as a buying
opportunity, and poured millions of dollars into futures contracts for steel
rebar, a reinforcing rod used in construction, and iron-ore, a steelmaking
component. Prices of steel rebar shot up by more than 50% in the first four
months of 2016.

In Alang, shipyards whose businesses had slowed
during the steel-price slump of the past few years rushed to buy boats,
spending millions of dollars per vessel. During the first six months of this
year, 185 vessels arrived at Alang’s yards -- nearly equal to the 196 for all
of last year. Workers started pouring into Alang from surrounding villages,
drawn by the extra jobs.

The boom was short-lived. Chinese regulators, fearing
a speculative bubble in commodities prices, raised the amount investors must
deposit to trade iron ore and steel rebar. Prices on Chinese exchanges began
tumbling in late April and collapsed in May, falling nearly as low as they were
at the start of the year.

The rapid seesaw in prices—which fell as much as 30%
in four weeks—caught yard owners like Mr. Aggarwal off guard. The yards operate
on razor-thin margins, without hedges, and they typically won’t buy boats if
they think prices will fall significantly during the three or four months it
takes between the purchase of a ship and the time it is disassembled for scrap.
The whipsawing prices this year meant expected profits for their scrap metal
turned to losses for most owners.

The last portion of the majestically-named M.V. King David, a bulk
carrier once used to fetch iron ore from Australia to China, is beached for
scrap at Hooghly Ship Breakers Ltd. PHOTO: KARAN DEEP SINGH/THE WALL STREET
JOURNAL

Some yards tried to renegotiate contracts after the
vessels arrived; others held on to the metal hoping prices would rise again.

One yard owner, who asked to remain unnamed, said he
bought a ship in January for around $280 per ton, including the cost of labor.
He ended up selling the scrap metal at a loss, for $250-$260 per ton, when the
ship was being broken up in April and May.

Workers at a shipyard in Alang use a cable to haul the last portion of
the M.V. King David, a bulk carrier that was sold to be broken down and turned
into scrap steel. Such ships also contain furniture, microwaves, dinnerware and
other goods, which end up being sold at a local bazaar. PHOTO: KARAN DEEP
SINGH/THE WALL STREET JOURNAL

“You can say we are caught in a casino-like
situation,” said Mr. Aggarwal, who is also the secretary of the Ship Recycling
Industries Association (India).

Prices of steel rebar futures in Shanghai have risen
again since late July to just below the highs in April, but Indian scrap prices
have lagged behind due to excess supply. Shipyard owners say they are cautious
about making fresh purchases after being badly bruised by the previous
volatility.

In the rows of wooden shacks that house thousands of
workers at one yard in Alang, many men are waiting without pay in case more
ships arrive, but face the prospect of returning home with no money for their
families.

Many poor men head to Alang seeking higher paychecks than they can earn
back home. Above, a worker cuts through metal at R.L. Kalthia Ship Breaking Pvt
Ltd. in Alang, India. PHOTO: KARAN DEEP SINGH/THE WALL STREET JOURNAL

Sushil Kumar Pal, 20, is worrying about money for his
two younger brothers’ schooling and for his elderly parents.

“There are so many workers here and not enough jobs
going around,” he says. “So how will anyone work?”